Mahalo Energy Ltd.

Mahalo Energy Ltd.

May 15, 2006 13:11 ET

Mahalo Energy Ltd. Announces First Quarter 2006 Results

CALGARY, ALBERTA--(CCNMatthews - May 15, 2006) -

Not for distribution to U.S. newswire services or dissemination in the United States. Any failure to comply with this restriction may constitute a violation of U.S. securities law.

Mahalo Energy Ltd. (TSX:CBM) (the "Company" or "Mahalo") is pleased to announce its financial and operating results for the three months ended March 31, 2006.

HIGHLIGHTS Quarter ended Quarter ended Quarter ended
March 31 December 31 March 31
2006 2005 2005


Natural gas sales $ 8,391,677 $ 8,152,613 $ 186,059

Operating netback (1) $ 4,838,881 $ 5,242,492 $ 124,121

Net income (loss) $ 544,306 $ 730,782 $(2,265,255)

Basic and diluted, per
share $ 0.01 $ 0.02 $ (0.12)

Funds from operations (1) $ 4,015,200 $ 4,121,780 $ (35,753)

Basic and diluted, per
share (1) $ 0.10 $ 0.10 $ (0.00)

Capital expenditures $31,956,475 $46,117,913 $ 3,720,953

Weighted average common
shares outstanding - basic 42,941,423 41,485,164 18,444,444

Weighted average common
shares outstanding -
diluted 44,013,115 42,853,229 18,444,444


Sales (Mcf/d, before
royalties) 10,125 7,730 257

Sales (MMcf, before
royalties) 911.3 711.2 23.1

Operating netback (per Mcf)

Average realized price $ 9.21 $ 11.46 $ 8.05

Netback (1) $ 5.31 $ 7.37 $ 5.37

(1) The terms, "funds from operations", "funds from operations per
share", "operating netback" and "netback" are not recognized
measures under Canadian Generally Accepted Accounting Principles
("GAAP") and are therefore referred to as non-GAAP measures. The
Company calculates funds from operations by taking net income and
adding back non-cash items including stock-based compensation,
depletion, depreciation and accretion, future income taxes and
unrealized foreign exchange gains and losses. Operating netbacks are
calculated by subtracting royalties and operating and transportation
costs from sales revenues. Management believes that these non-GAAP
measures are useful supplemental measures to provide shareholders
and potential investors with additional information regarding the
Company's liquidity, operating performance and ability to generate
funds to finance its operations. The Company's method of calculating
these measures may differ from other companies and accordingly, they
may not be comparable to measures used by other companies. These
measures should not be construed as an alternative to net earnings,
as determined in accordance with GAAP, as an indication of the
Company's performance.

Q1 2006 Highlights

- Drilled 35 (18.5 net) wells in the quarter

- Acquired an increased working interest position in the Poteau, Oklahoma area

- Invested $32 million through capital expenditures

- Initiated Mannville production at Corbett Creek property in Alberta

- Increased daily average natural gas sales to 10,125 Mcf in Q1 2006 compared
with 7,730 Mcf in Q4 2005 and 257 Mcf one year ago

- Increased cash flow to $4.0 million in the current quarter from an
insignificant level within a year

- Generated a net profit of $0.5 million in the current quarter

- Despite dewatering time delays, sales volumes have climbed to an estimated
rate varying between 11.5-12.0 MMcf per day entering Q2 2006. The variance is directly related to the efficiency of the bottom-hole pumps dewatering the coal.

- Increased borrowing capability under revolving credit facility to US $23.5 million. The facility is currently under review and a further increase in the borrowing base is anticipated in the near future.


We are pleased to report that Mahalo has continued the impressive growth shown in 2005 into the first quarter of 2006. Natural gas sales during first quarter 2006 averaged 10.1 MMcf per day, up by 31 per cent from the 7.7 MMcf per day sold in the fourth quarter of 2005.

Natural gas sales revenue increased to $8,391,677, funds from operations amounted to $4,015,200 and net income was $544,306 in the first quarter of 2006. In comparison, during the immediately preceding quarter, the Company had sales of $8,152,613, funds from operations of $4,121,780 and net income of $730,782.

Current period sales volumes increased primarily as a result of inclusion of a full three months of natural gas sales at Lakeview, a property acquired effective November 1, 2005 and from increased ownership in producing assets at Poteau, effective February 15, 2006. Sales volumes also benefited from commencement of production at the Company's Corbett Creek property in Alberta.

Although current quarter sales volumes were significantly higher than in the preceding quarter, a drop in the average realized price from $11.46 per Mcf in fourth quarter 2005 to $9.21 per Mcf resulted in a current quarter sales revenue increase of only three per cent.

Operating netback, being sales revenue less royalties, operating and transportation expense, amounted to $4.8 million and $5.2 million in first quarter 2006 and fourth quarter 2005, respectively. The average per unit netback in the current quarter was $5.31 per Mcf, down from $7.37 per Mcf in the immediately preceding quarter, with a majority of the decrease caused by lower realized natural gas prices.

Mahalo's capital budget for 2006 is strategically front end loaded, meaning a majority of drilling will occur in the first half of the year. Mahalo drilled aggressively within both its operated and non-operated properties in first quarter 2006.

Capital expenditure on exploration, development and infrastructure totaled $20.9 million in first quarter 2006, including $14.0 million and $6.9 million in Canada and the United States, respectively. The Company drilled 13 (9.0 net) wells in Canada and 22 (9.5 net) wells in the United States. Due to spring breakup, required infrastructure to accommodate tie-ins and the need to dewater unconventional production, Mahalo will not realize full performance from such wells until later in the year.

During the quarter, the Company commissioned its gas facility in the Corbett Creek area of Alberta and initiated drilling within its west central Alberta area, referred to as the Camrose fairway. As a result of this drilling, a full scale development plan is currently underway for this large core area.

During this period, the Company also invested $11.1 million to increase its working interest at Poteau. The consideration consisted of $8.4 million of cash and 381,964 common shares at $7.00 per share.

Mahalo will continue to develop and drill coalbed opportunities throughout the upcoming quarter. In addition to the large inventory of coalbed methane drillable locations, it is Mahalo's intent to continue moving forward on its shale gas development through extensive seismic, mapping and selective drilling. Mahalo is working with its partners to identify associated infrastructure needs. This work will allow Mahalo to determine an optimal development profile for the acreage and bring the Company closer to expediting a larger shale gas development program.

Finally, despite softness in current natural gas pricing, Mahalo will continue to execute its strategy, which in 2006 entails a mandate of completing an extensive sampling of its vast land base, both in Canada and the United States. This will allow Mahalo to maintain its momentum, better prioritize and aggressively pursue the most profitable opportunities in 2007. Prudent cash management is of high importance to our company; our objective is to ensure sufficient cash resources to execute this 2006 mandate. Accordingly, we continue to carefully assess the volatility of natural gas prices and will consider a possible increase in hedging through fixed price contracts or other alternatives to protect our cash flows.

Further information about our first quarter is set out in our Managements' Discussion and Analysis for the three months ended March 31, 2006.

Subsequent event

On April 12, 2006, the Company announced that it had entered into an arrangement agreement to acquire all of the outstanding common shares of Peregrine Energy Ltd. Peregrine is a Calgary-based crude oil and natural gas company with properties located primarily in Northeast British Columbia and West Central Alberta. Its properties are of a conventional high risk/high reward nature and compliment Mahalo's low risk North American coal bed development and exciting shale gas opportunities.

Our vision remains focused on exploiting opportunities to grow our unconventional asset base. Mahalo has a significant inventory of drillable unconventional prospects; our ability to exploit this asset base will be more do-able with additional qualified technical personnel that have experience in large, multi-hundred well programs. The acquisition of Peregrine will also allow us to rationalize and thereby maximize value from a combined asset base. We will be in a better position to remain a low cost operator, minimize finding and development costs and sustain our past performance and momentum. We are confident that we can continue to add net asset value for Mahalo shareholders on a go forward basis.

Annual Meeting

The Company's Annual Meeting of Shareholders is scheduled for 9:00 a.m. on Wednesday, May 31, 2006 at the Sheraton Suites Calgary Eau Claire, 255 Barclay Parade S.W., Calgary, Alberta.

Additional Information

Mahalo's unaudited consolidated financial statements and related managements' discussion and analysis for the three months ended March 31, 2006 have been filed on SEDAR at For additional information on the Company, please go to the Company's profile on SEDAR or the Company's website at

Mahalo is a junior, unconventional natural gas producer, focusing on the production and development of deeper Mannville coal bed methane deposits in western Canada and is successfully developing both coal bed methane and shale gas prospects in the United States.

Forward-looking Statements

Except for historical financial information contained herein, the matters discussed in this document may be considered forward-looking statements. Such statements include declarations regarding management's intent, belief or current expectations. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties; actual results could differ materially from those indicated by such forward-looking statements. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are: (I) that the information is of a preliminary nature and may be subject to further adjustment, (ii) the possible unavailability of financing, (iii) risks related to the exploration and development of oil and gas properties, (iv) the impact of price fluctuations and the demand and pricing for oil and natural gas, (v) the seasonal nature of the business, (vi) start-up risks, (vii) general operating risks, (viii) dependence on third parties, (ix) changes in government regulation, (x) the effects of competition, (xi) dependence on senior management, (xii) impact of economic conditions, and (xiii)fluctuations in currency exchange rates and interest rates. Mahalo undertakes no obligation to update or revise any forward-looking statements, except as required by law.

The Toronto Stock Exchange has not reviewed and does not accept responsibility for the adequacy of accuracy of this press release.

Contact Information

  • Mahalo Energy Ltd.
    Duncan Chisholm
    Chief Executive Officer
    (403) 262-9623
    (403) 262-7049 (FAX)
    Mahalo Energy Ltd.
    Milton Porter
    Chief Financial Officer
    (403) 262-9623
    (403) 262-7049 (FAX)
    Mahalo Energy Ltd.
    201b, 218 - 8th Avenue S.W.
    Calgary, Alberta T2P 1B5
    (403) 262-9623
    (403) 262-7049 (FAX)